Myrdal Boots can take a cash discount but has to borrow money from the bank to do so. The bank offers a 12% interest rate. The terms of the cash discount are 3/10, net 90. Because of this, Myrdal Boots should borrow from the bank to take the discount.

Question

Quizplus · Accepted Answer

The cost of not taking the discount is higher than the cost of borrowing from the bank. The discount of 3% for paying 80 days earlier (90-10 days) is more advantageous than the annual interest rate of 12%, especially when considering the effective annual rate of forgoing the discount is much higher.

Myrdal Boots Can Take a Cash Discount but Has to Borrow